Lead Opinion
Appellant, Rosemarie Noble, purchased a health insurance policy from appellee, National American Life Insurance Company. Subsequently, she had surgery which resulted in surgical and hospital expenses of $1,503.53. A claim under the health insurance policy was submitted to the insurance company, but it refused to pay the сlaim. Appellant filed an action in the superior court alleging in count I, breach of contract
The superior court granted the defendant insurance company’s motion to dismiss count II for failure to state a claim for relief. The superior court, pursuant to Rule 54(b), Arizona Rules of Civil Procedure, entered judgment dismissing count II. A timely appeal was filed.
The issue presented is whether Arizona recognizes as a tort an insurer’s bad faith refusal to pay a valid claim submitted by its insured under a policy of insurance.
While there are no Arizona cases precisely on point,
The leading case on this issue is the California Supreme Court’s decision in Gruenberg v. Aetna Insurance Co.,
It is manifest that a common legal principle underlies all of the foregoing decisions; namely, that in every insuranee contract there is an implied covenant of good faith and fair dealing. The duty to so act is imminent in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. Gruenberg, supra,9 Cal.3d at 575 ,510 P.2d at 1038 ,108 Cal.Rptr. at 486 .
A few jurisdictions have criticized the Gruenberg rationale and have refused to follow it. See Santilli v. State Farm Life Insurance Co., supra; Lawton v. Great Southwest Fire Insurance Co.,
We are persuaded that there are sound reasons for recognizing the rule announced in Gruenberg. The special nature of an insurance contract has been recognized by courts and legislatures for many years. A whole body of case and statutory law has been developed to regulate the relationship between insurer and insured. An insurance policy is not obtained for commercial advantage; it is obtained as protection against calamity. Egan v. Mutual of Omaha Insurance Co.,
A final point raised by the parties and Amici is that the elements of this tort are not really defined. We disagrеe. Probably the best exposition on this point is the Wisconsin Supreme Court’s decision in Anderson v. Continental Insurance Co., 85 Wis.2d 675,
To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one.
The tort of bad faith can be alleged only if the facts pleaded would, on the basis of an objective standard, show the absence of a reasonable basis for denying the claim, i. e., would a reasonable insurer under the circumstances have denied or delayed payment of the claim under the facts and circumstances.271 N.W.2d at 376-77 .
Under the Anderson standard an insurance company may still challenge claims which are fairly debatable. The tort of bad faith arises when the insurance company intentionally denies, fails to process or pay a claim without a reasonable basis for such action.
Although the allegations of count II of the complaint leave much to be desired, the plaintiff should be allowed to amend the complaint to set forth, if possible, sufficient ultimate facts to state a claim. It is evident, however, that the superior court dismissed count II because it believed that Arizona did not recognize the tort of bad faith failure or refusаl to pay a first party insurance claim. The judgment of the superior court dismissing count II is reversed with directions to reinstate count II of the complaint and proceed consistent with the views expressed in this opinion.
Notes
. Count I was dismissed pursuant to stipulation of the parties soon after plaintiff filed this appeal.
. In the only Arizona casе mentioning this issue, the court of appeals implied in dicta that they might recognize the tort of insurer bad faith refusal to pay reasonable claims. John Hancock Mutual Life Insurance Co. v. McNeill,
. See also Corwin Chrysler-Plymouth, Inc. v. Westchester Fire Insurance Co.,
Dissenting Opinion
dissenting.
Appellant, Rosemarie Noble, brought this action alleging in one count of her complaint a breach of contrаct, and in a second count a breach of implied warranty of good faith and fair dealing by her insurer, the National American Life Insurance Company. After a voluntary dismissal of count one, leaving only count two, the Superior Court dismissed appellant’s complaint for failure to state a claim upon which relief could be granted. Both parties to this action urge this Court to decide whether Arizona recognizes a claim in tort for an insurer’s refusal to deal fairly and in good faith with its insured. It is my opinion that the issue is not properly presented for decision because appellant’s complaint did not allege sufficient facts to state a claim of an insurer’s refusal to deal fairly and in good faith. I also believe that the creation of a cause of action where none previously existed is best left to the legislative branch of government.
We said in Phoenix Professional Hockey Club, Inc. v. Hirmer,
*191 “The relation between the remedies in contract and tort presents a very confusing field, still in process of development, in which few courts have made any attempt to chart a path. The earliest cases arising in the borderland were those of negligence on the part of persons engaged in a public trade or calling, as where a ferryman overloaded his boat and drowned the plaintiff’s horses, or a smith lamed a horse while shoeing it. The action was on the case, and the underlying theory seems to have been at first one of pure tort. In the course of time the defendant’s ‘assumpsit,’ or undertaking, came to be regarded as the real foundation of the action; and with the development of the action of assumpsit and the idea of consideration, the obligation of the contract became recognized, as in itself a basis of liability. The tort remedy survived, however, in the situations where it had already existed; and the more or less inevitable efforts of lawyers to turn every breach of contract into a tort forced the English courts to find some line of demarcation.” Prosser, The Law of Torts (4th ed. 1971) § 92, p. 614. (Footnotes omitted.)
Heretofore, only if a duty is owed independent of the contract, although arising from a contractual relationship and imposed by law on the relationship, has a tort remedy been available. See McClure v. Johnson,
Appellant alleges in this case that appellee breached its “duty to pay the just claims of its insureds and [the] implied warranty of good faith and fair dealing.” Appellant’s position is that by simply refusing to pay the claim of its insured, appellee breached a general duty of good faith and fair dealing imposed by law upon all insurers.
The general duty to exercise good faith and fair dealing is implied by law in all contracts. Beaugureau v. Beaugureau,
While there are situations in which a breach of contract may also be the predicate for claims in tort, see Prosser, supra, the facts do not support such a claim here. In Taylor v. Herbold,
“‘The distinction is this: If the cause of complaint be for an act of omission or nonfeasance, which, without proof of a contract to do what has been left undone, would not give rise to any cause of action (because no duty apart from contract to do what is complained of exists), then the action is founded upon contract, and not upon tort.’ ” Taylor v. Herbolé, supra at 669.
The faсts alleged in appellant’s complaint show that the insurance policy provided coverage for surgical and hospitalization expenses but that the appellee rejected appellant’s claim, seemingly paying it after suit was brought. Appellant then asserted, “[bjecause of defendant’s breach of its duty to pay the just claims of its insureds and implied warranty of good faith and fair dealing” appellant suffered various losses and injuries. The complaint, while alleging a breach of contract for nonpayment, fails to allege any additional facts from which it could be inferred that the breach was predicated upon wrongful conduct indeрendent of the breach itself. There are consequently no facts pleaded which will support a claim in tort.
In Findley v. Time Ins. Co.,
“In conclusion, we do not reject the possibility that an insurer may be liable in tort, аs in Fletcher [v. Western Nat. Life Ins. Co.,10 Cal.App.3d 376 ,89 Cal.Rptr. 78 ,47 A.L.R.3d 286 (1970)] and Gruenberg [v. Aetna Insurance Co.,9 Cal.3d 566 ,510 P.2d 1032 ,108 Cal.Rptr. 480 (1973)], upon a showing that, without a good faith defense to the insured’s claim, it actively engaged in dishonest, malicious, or oppressive conduct in order to avoid its liability. Such questions we leave to the future. All that we now hold is that paragraph 12 of the present complaint does not state facts sufficient to constitute a cause оf action in tort.”573 S.W.2d at 911-912 .
In effect, the Arkansas court found that a mere denial of coverage, absent allegations that the insurer engaged in affirmative conduct which would constitute bad faith or fraud, does not create liability.
I reach the same conclusion here, believing that even under the most liberal interpretation of the law thе second count of the complaint does not allege sufficient facts to constitute a cause of action in tort against the insurer.
Notwithstanding the obvious infirmities of appellant’s pleading, the majority of this Court point to the opinion in Gruenberg v. Aetna Insurance Company,
In Gruenberg v. Aetna, the California Supreme Court said:
“Thus in Comunale and Crisci we made it clear that ‘[liability is imposed [on the insurer] not for bad faith breach of contraсt but for failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing.’ (Crisci, supra, 66 Cal.2d [425] at p. 430, 58 Cal.Rptr. [13] at p. 17, 426 P.2d [173] at p. 177.) In those two cases, we considered the duty of the insurer to act in good faith and fairly in handling the claims of third persons against the insured, described as a ‘duty to aсcept reasonable settlements.’; in the case before us we consider the duty of an insurer to act in good faith and fairly in handling the claim of an insured, namely a duty not to withhold unreasonably payments due under a policy. These are merely two different aspects of the same duty.”510 P.2d at 1037 .
Whatever may be the merits of this specious anаlogy that the two cases present “merely two aspects of the same duty,” there is a clear distinction which led the Supreme Court of Oregon, in Santilli v. State Farm Life Ins. Co.,
“[T]here is a distinct difference between liability insurance and other types of policies which should not be overlooked.
When an insured purchases liability insurance, he relinquishes his right to contrоl any litigation brought against him for conduct which is covered under the policy, and he loses his right to negotiate a settlement with the opposing party. Moreover, when the settlement value of a case approaches the policy limits, it becomes increasingly more tempting for the insurer to gamble on the results of litigation, for in refusing to settle under such circumstances, the insurer stands tó lose little and gain much. The insured, however, has a strong interest in settlement so as to avoid a judgment in excess of his coverage. Because of his conflict, courts have held insurers to a high duty of good faith and fair dealings when conducting settlement negotiations on behalf of their insured.
Suсh considerations are not applicable outside the field of liability insurance. In cases involving the insurer’s duty to pay under policies for theft, fire, health, disability or life insurance, the unique relationship which gives rise to the special duty of liability insurers to attempt to settle within their policy limits does not arise. The insured, or his beneficiary is*193 not subjеct to the imposition of excess liability, and his rights and responsibilities are limited to those set forth in his contract.”
A year later, in Farris v. U. S. Fidelity and Guaranty Co.,
See also, Lawton v. Great Southwest Fire Ins. Co.,
“We therefоre find no basis for extending the duty recognized in those cases to the first-party claim. We hold that allegations of an insurer’s wrongful refusal or delay to settle a first-party claim do not state a cause of action in tort.” (Citations omitted.)
And it had been held that even a malicious or bad faith motive in breaching a contract does not convert a contract action into a tort action. See, e. g., Wild v. Rarig,
By Ch. 170, § 2, Laws 1976, as amended by Laws 1978, Ch. 84, § 2 (codified as A.R.S. § 12-341.01(A)), the Arizona Legislature has provided that in contested actions arising out of contract the court may award the successful party reasonable attorney’s fees, and by subsec. C thereof, reasonable attorney’s fees shall be awarded by the court in any contested action upon clear and convincing evidence that the claim or defense “constitutes harassment, is groundless and not made in good faith.” Plainly the Legislature is not unaware of bad faith motives in breaching a contract and has provided a remedy by which a party may recover his expenses if compelled to litigate. A change in the law which the majority impatiently press forward to make should more properly emanate from the Legislature, where a thorough assessment and evaluation of necessity and the social and economic implications may be considered.
I would affirm the judgment of the Superior Court.
I concur in the dissent.
. For a recent case listing the existing cases in the United States on both sides of this matter and summarizing the reasons usually advanced for adopting or rejecting Gruenberg v. Aetna Insurance Company, see Spencer v. Aetna Life and Cas. Ins. Co.,